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Finance

THE VALUE OF DIGITAL IDENTITY IN PAYMENTS

By Vince Graziani, CEO, IDEX Biometrics ASA

In ever more challenging times, the payments industry needs to maintain trust by finding a way to protect consumers from the constant threat of payment fraud and theft. Consumer’s wishing to limit physical contact during the current pandemic has led to the popularity of contactless payments which has accelerated in multiple territories.

In the US, one in five shoppers have made a contactless payment for the first time during the pandemic according to research published in August by the National Retail Federation and Forrester. The bad guys have unfortunately taken note. This has led to a real need for the industry to fight back with enhanced security.

At the 2019 Money2020 Europe conference, there was a universal call for a comprehensive form of digital identity (ID) to enable digital payments. A form of digital identity that would make cashless payment interactions – secure, intelligent, efficient and private. The feeling was unanimous: without functioning digital ID, the payments revolution will stall.

 

Unlocking the payment ecosystem

In an increasingly connected world, consumers find themselves needing to authenticate their identity daily. Whether that be with financial institutions, retailers, government departments or healthcare providers. Yet, it is rarely known where consumer data is stored, how secure it is or how it may be traded. Privacy regulations such as the European Union’s General Data Protection Regulation (GDPR) have attempted to restore some trust, but the industry still has a way to go.

Currently, authentication is fragmented and unwieldy. It requires a mix of hardcopy documents, online login credentials and digital wallets. This is not only frustrating for consumers but leads to the reuse of passwords and PINS that make the user vulnerable to fraud. Mastercard believes there is a clear need for a verified identity that is accepted globally and across multiple digital touchpoints and doesn’t involve aggregating more information in potentially vulnerable data stores, but instead gives the individual control over their identity data.

An integrated digital ID scheme would enable the payments industry to fight fraud on a global scale. It would also meet the pressing need for a payment authentication system that consumers can access anytime, anywhere, and on any device. This joined-up approach is vital to ensure no consumer is left behind as the world continues its digital transformation.

Providing access to a singular, unified digital ID will not only streamline the identity process, but also unlock new and enhanced consumer experiences during this digital transformation. Particularly in the new breed of smart buildings and cities, where everything from travel to payment systems will be connected to a user’s identity.

 

What form should our digital ID take?

While the need for digital ID is well established, the form it will take is less clear. There are two main challenges that payment providers need to overcome with a potential new identity solution: onboarding new users and ensuring the digital ID is compatible with all transactions.

Placing individual consumers at the centre of their own digital interactions will ensure confidence and broader adoption of new technology payments and services. Yet, for this to be successful, the payments industry must adopt a process that is simple, familiar and easy to understand.

 

Fingerprint biometrics as a digital identity

The use of fingerprint authentication to unlock a smartphone is now deeply entrenched. As far back as 2016, 89 percent of users with compatible iPhones were using fingerprints to unlock their devices. The solution for a frictionless onboarding has been at our fingertips the whole time.

Payment providers can incorporate fingerprint biometric sensors directly into their new breed of smart payment cards. A biometric payment card may be a new concept, but payment providers and retailers across the world are already using contactless card technology in the payment process, so it is the next logical step. Consumers are now used to carrying a card and tapping it for contactless payments. Plus, as we have seen, consumers are used to using their fingerprint as an authentication mechanism. Perhaps biometric cards could be the catalyst for financial inclusion desired by the World Bank, as they don’t require the ownership of expensive smartphones in developing nations.

 

Building a chain of trust with biometrics

Continuous developments in payment regulation mean that secure authentication is imperative. Under the second Payment Service Directive (PSD2) European banking regulation, all payment transactions will soon require Strong Customer Authentication (SCA) to validate users at the point of transaction to reduce fraud and increase security for customers. SCA requires two forms of authentication for every transaction above the contactless limit. While one is generally something you have like a smart card, the second can be something you are like a fingerprint.  Using a fingerprint means that it can be used across multiple platforms and is always at hand. There should be no trade-off between convenience and privacy and fingerprint biometrics delivers on that expectation.

Biometrics can play an essential role in digital ID, significantly limiting exposure to potential fraud and criminality. The addition of a biometric sensor onto a payment card creates a secure ‘chain of trust’ that indelibly connects the user to the card. Furthermore, digital ID has the scope to be extended far beyond payments and used as a unique identifier in areas such as access, government ID and even across IoT devices.

 

Securing the future of the payments industry

While the world is becoming ever more cashless, commentators and analysts all agree – without a fully functioning digital ID, the payments revolution will stall. As Tony McLaughlin, Emerging Payments and Business Development at Citi put it recently: “If we fix digital identity, we fix payments”. I couldn’t agree more. Both consumers and the payments industry need a user-centric digital ID that is owned and managed by the individual, so they can unlock the full advantages of a transformative digital payment ecosystem.

Using fingerprint biometrics as a digital ID in a payment card will transform the way people authenticate transactions. This integration would enable consumers to confirm their identity wherever they are, on any device, and across every transaction. It will change the face of digital identity as we know it.

We believe that digital interactions should be privacy-enhancing, secure, intelligent, and efficient. To facilitate this, consumers require a user-centric digital identity that is owned, managed, and controlled by the individual. It is time to place individuals at the heart of their digital interactions globally.

 

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Finance

FROM COVID TO CURRENCY CRISIS?

One hallmark of the United States’ superpower status is the primacy of the dollar. All regimes rise and fall. There are reasons to believe the US dollar is at risk of losing its status. How likely is this, why, and what might follow?

There are several ways to measure dollar primacy.

First, the US dollar accounts for 62 percent of global central bank reserves, according to the International Monetary Fund. The euro is about 20 percent, and the Chinese yuan 1.9 percent.

Second, in payments, the dollar accounts for 40 percent of cross-border transactions intermediated by SWIFT, a global messaging system for corresponding banking. The yuan: under 2 percent.

Third, in foreign-exchange markets, the dollar is on one side of about 90% of swaps.

And fourth, US Treasuries are considered the ultimate safe haven, which is why foreigners hold nearly $7 trillion of them.

Dollar primacy made sense in the 1940s when the Bretton Woods arrangement cemented its reserve status. The US economy accounted for more than 50 percent of global output, with Europe and Asia devastated by war.

Jame DiBiasio

Today the US accounts for around 15 percent of global GDP. China now accounts for around 18 percent, in purchasing-power parity terms (although the US economy is still larger in nominal terms). The vast discrepancy for the US and China between their economic positions and the influence of their currencies is stark.

Economic prowess is not the sole determinant of a currency’s power, although it suggests long-term directions. The US outpaced Britain as the world’s biggest economy in 1871 but it would take seventy years before the dollar displaced sterling as the leading currency.

Moreover, the tussle between the dollar and the pound was not straightforward. Late nineteenth century America was powered by its farms and factories, but financially it was immature, its banking system haphazard. American merchants had to conduct foreign trade in sterling, not dollars.

London had been the world’s financial center, with the pound at the heart of its money markets, since the founding of the Bank of England in 1694. Despite Britain’s relative economic decline, the gold-backed pound was a reliable, trusted system – an example of the network effect, made valuable by the sheer number of institutions using it.

The dollar only began to compete when the US established the Federal Reserve in 1913, bringing some stability to its banking system. In the 1920s the dollar became a reserve currency on par with sterling, but the Fed botched the 1929 Wall Street crash and the dollar slipped. Only after the devastation of World War II did the dollar triumph. Even then it remained tied to gold, until Richard Nixon floated the currency in 1971.

Since then we have lived in a world of fiat money, money that is based on the power and prestige of government rather than any intrinsic value.

That time also marks the appearance of electronic financial networks.

Techno-capitalism, cheered on by the Reagan-Thatcher model of government, has driven globalization and free capital flows. Since Nixon’s time, America has also supported the rise of China, as part of its overall promotion of free trade and open markets. This US support was initially to counter the Soviet Union but in the 1990s, buoyed by the end of the Cold War and US corporations’ eagerness to outsource labor to China, the pro-engagement argument took on a life of its own.

As America exported jobs it also exported dollars. It fended off challenges from the yen in the 1980s and the euro from 1998. And the US remained blind to the instability of laissez-faire capital flows because the growing list of crises – Latin America, Japan, East Asia, Russia – was “over there”. Domestic problems were viewed as scandals, the accounting frauds of a few bad apples, rather than symptoms of a broader problem.

The 2008 Global Financial Crisis, and its sequel in the eurozone, nearly destroyed the status quo. Even China had to respond to the economic fallout by pumping its economy with credit. But in the US, although the banking system was stabilized, the response was not the sort of austerity demanded of emerging markets. Instead the Fed slashed interest rates and began purchasing Treasuries and other securities, to bring even long-term rates as low as possible.

Japan had been doing this sort of thing for decades, and the eurozone followed suit. The developed world has abandoned laissez-faire in its capital markets, a trend exacerbated by reckless corporate tax cuts made by US Republicans in 2018.

By now, however, China had clocked three decades of heady growth. A cheap and skilled workforce combined with good infrastructure made China the workshop of the world. Its vast middle class hinted at a giant consumer economy in the making.

China’s monetary policy is however immature. It maintains a managed peg to the dollar, along with the rest of Asia (except Japan). China has been a huge importer of direct investment but not financial flows. On the contrary, China has been a vast exporter of capital – it’s a major buyer of US Treasuries – despite its hunger for financing its growth. China has preferred to finance this growth through forced savings among its financial institutions (and therefore its people).

Since the 2000s, Chinese leaders have attempted to rebalance the economy by reducing debt-funded infrastructure and real-estate spending (which support its exports) and growing a domestic consumer market. These attempts always crash into the Communist Party’s insistence on controlling all levers of power and bolstering the privileges of state-owned enterprises over the private sector.

Although both the US and China pursue flawed policies, the status quo might have continued for a long time, but the COVID-19 pandemic has accelerated their respective paths.

China responded with a brutal but effective lockdown. The West has unleashed record borrowing to try to salvage its economies. The Federal Reserve has expanded its securities purchases to levels that were unimaginable even during the scariest moments of the GFC.

This raises the question of the sustainability of the currency regime. China and other holders of US Treasuries are now earning almost zero yields. Given America’s future liabilities (pension and healthcare costs), its handling of the GFC shows that it is almost certain to continue to borrow rather than cut spending or raise taxes.

Such spending can be a net benefit if it supports economic growth. If the US invests in, say, its infrastructure and education system, it would be laying the groundwork for long-term prosperity. This may yet happen, but even so, Treasury holders are looking at a grim forecast.

Central banks and global investors will seek alternatives. The yuan is starting to look more attractive. China has its macro problems. But it is the only major economy running a conventional monetary policy, which is to say it is paying investors a yield. Chinese stocks and bonds are now part of global investment indexes. Even as the Trump administration attempts to freeze China out of the global economy, US money managers and banks are making a beeline to participate in China’s financial markets.

The network effect and the sheer weight of Wall Street will keep the dollar dominant for some time. China must still earn investors’ trust. Its introduction of a digital yuan, however, will make transacting the currency much easier. China is laying the groundwork for a new financial system, based on technologies such as blockchain, that may well come to challenge the status quo, starting in emerging markets.

Just as the US in the 1910s undertook the reforms to create a credible financial system, China is trying to do something similar today. It has a long way to go and it faces internal political contradictions (comparable to Japan’s challenges in the 1980s). The US could also reform its monetary and fiscal policies, breathing new life into the dollar regime.

We are probably entering a phase of competition between the dollar and the yuan, and there is no predetermined outcome. America may not get to enjoy the luxury of a gradual transition, though: just as the Suez Crisis of 1956 destroyed British pretensions about the pound, an escalation of the US-Sino conflict could have a similar effect.

The irony is that the biggest winners from a healthy rebalancing among currencies would be ordinary Americans. Dollar primacy benefits Washington, which increasingly relies on the world’s dependence on the dollar as a tool to impose punishments on its enemies. And it benefits Wall Street, the heart of the American dollar export machine. But this arrangement means more debt at home and more jobs sent abroad.

For America to invest in itself it must make it unattractive for its own companies and financiers to send dollars overseas. It can try to do so of its own volition – or risk being forced.

 

Cowries to Crypto: The History of Money, Currency and Wealth by Jame DiBiasio and illustrated by Harry Harrison is published by OANDA, a global leader in online multi-asset trading services. It will be available from 1 September on amazon.co.uk, priced at £19.99.

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Business

ACCOUNTANTS HAVE BECOME CRITICAL TO THE SURVIVAL OF BUSINESSES AND THEIR REPUTATIONS DURING COVID-19

Stuart Cobbe, Director of Growth, Europe, MindBridge

 

The opportunity for fraudulent activity to flourish as finance departments operate remotely with less oversight in these extraordinary Covid-19 times is inevitable. Government loans and financial support have been given out with little or no accountability to businesses that are struggling with the change in their trading environment and as a consequence businesses find themselves in financial need.

There is already evidence of corporations handing back furlough grants as HMRC offers a 90-day amnesty, but without rapid data-driven insight and risk stratification, businesses may not know the extent of their exposure. Indeed many businesses face the daunting prospect of repaying loans at the same time as paying deferred VAT early next year in a far from certain trading environment. Stuart Cobbe, Director of Growth, Europe, MindBridge explains that the role of the accountant has now become critical to businesses and their reputations.

 

Unlocking transparency

The Covid-19 landscape is fluid and ever-changing, and businesses require accurate visibility of all aspects of their business in order to plan effectively for the future and to understand their financial position. As the economy continues to recover to a new ‘normal’, companies need to focus on the next 6 months. How many ‘zombie’ businesses are only operating due to deferred VAT payments? How many companies will fail when they cannot repay loans? The role of the accountant is vital in unlocking this transparency to provide data-driven, actionable insights.

After all, there are many questions around how government financing has been used, from grants to loans, furlough payments to VAT deferments. As of the 20th September, the total cost of furlough claims has reached a staggering almost £40 billion, despite 30,000 applications being rejected, with many likely to have been attempts to defraud the taxpayer. Research by economists from Cambridge, Oxford and Zurich universities found that as many as two thirds of furloughed workers continued to work.

For businesses that do not understand the extent of their exposure, they risk facing a HMRC-imposed tax charge equivalent of up to 100% of the grant to which any recipient was not entitled and was not repaid. It is, therefore, interesting to see the number of large organisations now publicly revealing plans to repay all furlough payments. For many, this is an opportunity to boost corporate reputation and demonstrate a commitment to rediscovering business as usual. However, given the huge pressures businesses have been under in recent months, many CFOs and FDs may not have the full visibility they require to effectively manage this without the power of audit.

 

Financial Risks

This is about far more than reputational damage, the potential misuse of furlough is far from the only financial risk. The extraordinary shift in every business’ modus operandi over the past few months has opened the door for opportunistic fraud. New sources of income; staff working from home with limited oversight; the financial pressures – both business and personal – created by the recession. The misappropriation of assets should be a very real concern for businesses of every size.

For organisations that have relied upon grants and loans to survive, an employee exploiting the lack of oversight to syphon funds for personal use could tip the company into failure. Companies must determine how – or whether – deferred VAT payments and loan repayments can be made. Is the company truly solvent or no more than a ‘zombie’ business operating with a balance sheet propped up by short term government finance?

 

Actionable data

Business resilience and reputation is a priority in this era, and CFOs or FDs may be struggling to establish trust across businesses now operating under a whole new range of pressures, from slimmer margins to a disjointed, remote workforce. There is an obvious need for complete visualisation of financial risks, and accountants play a crucial role in unlocking this data.

The rapid identification of mistakes in government support applications, potential fraud and the analysis of which deferred payments and loan repayments can be made and when – whilst ensuring other risk factors do not jeopardise business stability – is essential to futureproof the business, and accountants can assess data to provide this information in a complete and actionable format to lead smarter company decisions. This is the data insight CFOs and FDs need today.

Traditional financial risk assessment models will not be adequate. At best, problems will be revealed months after the fact. Companies need rapid identification of areas of unexpected activity today. This is where accountants and finance departments using sophisticated machine learning and artificial intelligence techniques can deliver real business value by rapidly assessing financial data and surfacing unexpected activity. Armed with this information, finance teams will know where to focus activities, the questions to ask and the remedial action to take. This information will drive departments and remedial action to ensure business success and growth as the nation gets back to its feet.

In short, accountants and finance professionals can provide the answers businesses need today, whilst helping managers to plan for the future effectively, despite the changes in policies and protocols as the pandemic continues to throw curveballs. An audit can quickly identify problems including but not limited to, cash flow, fraud, misuse of grants, loan repayment issues – all whilst offering the guidance and steps to safeguard the business to promote resilience and protect the solvency and reputation.

 

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